The Curate’s Egg

After the civil wars which ravaged much of Central America had ended a decade ago, many international financial organisations, including the International Monetary Fund, began to encourage these war-weary countries to open their financial sectors up in order to stimulate their economies.  At that point in time, whilst Panama had ended a dictatorship and suffered politically, it had avoided the crushing long-term economic effects of insurrection.  Importantly, it already had the infrastructure of a prominent offshore banking industry in place and whilst, since then, there has been consolidation and the inevitable results of recent economic weaknesses, Panama presents a picture of regulatory rectitude within its banking centre compared with many of its northern neighbours.   Its money laundering controls are also advanced and it is presently advising both Costa Rica and Guatemala on such issues.  Earlier this year Panama was instrumental in helping Russia with the drafting of money laundering legislation and the chief legal adviser to Panama’s Superintendent of Banks has been appointed deputy director of the Financial Action Task Force’s Caribbean group of jurisdictions.  The FATF is a creation of the Organisation for Economic Co-operation and Development and has gained international recognition from its published black list of countries with unsatisfactory money laundering controls.

Banking in Central America can be likened to the proverbial curate’s egg:   good in parts.  The folly of liberalised markets without the counterbalance of controls has left many banks in Central America in a parlous state.  Guatemala, Honduras and Nicaragua are having to bail out banks whose reckless loan practices have brought disastrous results.  In the case of Guatemala, the central bank has had to advance US$524 million in emergency credit to its banks.  In the last year, 3 of Nicaragua’s 12 banks have failed.  It is estimated that the cost of the clean-up could be over US$100 million, which amounts to 2.5 per cent of the country’s GDP.  

Besides a proliferation of small poorly-managed banks, cronyism and vested interests played a role as well.  In some instances loans, at low rates, were made to favoured companies; loan portfolios were often too concentrated in certain sectors instead of covering a broader base.  Better government regulation would have made a marked difference and would have avoided the need now for some governments to guarantee bank deposits rather than risk a crisis of confidence in their banking systems.  Those banking systems which had been nationalised suffered when loan restrictions were lifted and interest rate ceilings were removed, but the necessary supportive regulations were not in place.  Costa Rica, to a lesser extent, has suffered from poor controls also, but the one positive exception in all of this appears to be El Salvador – probably because it has only 3 leading banks, all of which are very efficient.  The country has also followed the Panama precedent and adopted the US dollar which will bring benefits but will also mean that bankers’ previously large profits will suffer as lending rates decline.  With few exceptions, last century’s social breakdown has been replaced by this century’s financial collapse.

Terrorism’s Toll

The Economic Commission for Latin America and the Caribbean has forecast that the region could grow by about 2 per cent in 2001, down from the 4 per cent registered last year.  Following the terrible terrorist attacks in New York and Washington in September, a grim global economic picture has just got worse.  The biggest fear is that the economic recession in the United States will greatly reduce Latin America’s exports and trade deficits will increase as lower prices and demand take their toll.   The current account deficit is expected to equate to some 3 per cent of regional GDP.  The 2 largest economies, Brazil and Mexico, have been particularly hard-hit and have recorded very disappointing growth rates.  Argentina is in its fourth year of recession; the prospect that it could default on its US$130 billion external debt is real at the time of writing.  Brazil has seen the value of its currency, the Real, decline by around 30 per cent this year and Mexico, which is now the region’s biggest economy, could suffer greatly because 85 per cent of its exports go to the United States.  But the real casualties, with negative growth rates expected, are Argentina, Peru and Uruguay.  The situation will not be helped by the fact that many of Latin America’s structural reform plans have stalled due, in large part, to delays in several privatisation programmes.  

Despite a pervasive pessimism throughout much of the continent, there are still positive developments.  One such development which is of great significance to Panama concerns that country’s emergence as, potentially, a major technology centre.  Panama’s distinct advantage lies in the fact that 5 international broadband fibre-optic cables now converge there, crossing between the Atlantic and Pacific oceans and building upon the country’s already vital role as a hub for international sea-bound commercial activity.  The establishment of a technology centre heralds perhaps the birth of a telecommunications canal, eventually operating in tandem with the existing one for shipping.  Even though the downturn in global telecommunications business will have its effect, data centres in Latin America are still expected to be a US$6 billion business by 2005.  And Morgan Stanley Dean Witter, the investment bank, calculates that e-commerce in Latin America could represent US$7.6 billion of business, or 0.34 per cent of GDP.  Panama already has one of Latin America’s first e-commerce laws.  

Worryingly, there are clear signs that inflows of capital into Latin America from direct investors have started to slow down at a time when they are most needed.  In many Latin American countries the result of America’s never-before stark exposure to ungodly acts of terror earlier this year will have more of a tidal, rather than a ripple, effect on their economies.